Payday loan industry is in the process of transformation, or it pretty much looks like this. As it is known, the interest rate of such loans are higher than the interest for using long-term loans. That’s one of the reasons these loans are censured and are considered to be the debt trap for borrowers. The Consumer Financial Protection Bureau (CFPB) has long been working on this case and in the nearest future they are going to interfere with the situation directly by introducing the new rule for creditors.
The main requirement of the CFPB is to provide the necessary conditions for consumers to repay the loan. This issue has caused many opinions and disputes.
The new rules are expected to be introduced in 2019, based on a full loan repayment test. In other words, when issuing a short-term loan, the lender and the borrower should mutually determine the repayment time of the loan; and if the loan is not repaid before the agreed period, the lender cannot withdraw money from the consumer’s account on their own. This rule applies to short-term loans for up to 45 days or for long-term loans the rate of which is more than 36% per annum. There are exclusions from this rule, such as: overdraft, student loan, mortgage loan.
The new rules is considered to be useful by many advocates for consumer rights, including the CFPB and members of the Democratic Party.
The advantages of the new rules include the following:
- Lenders are obliged to put forward a requirement for the borrower to confirm the solvency.
- While some creditors can refuse to borrow, others can still provide such loans.
- Clients will have to provide more accurate information about their incomes to creditors.
- A well-known fact is that creditors often use loopholes in the legislation. The new rules will not allow them to do this.
However, the following shortcomings of the new rule were named by specialists in the economic sector and banking:
- Litigation will take place in the result of the innovation.
- Receiving money before salary will occur with interest rates of 300% or more. Otherwise, banks and credit unions will not be able to enter the market with interest rates lower than declared.
- As a result, the new rule can create insurmountable obstacles for clients to obtain loans.
The opinion of the representatives of payday lenders and consumers diverge. What creditors consider a reasonable credit rate, the latter perceive as robbery.
The Consumer Protection Bureau claims that a detailed check of documents confirming the solvency of borrowers is a pledge of timely payments on the loan, which will save customers from debts that may arise as a result of untimely payments.